Taxpayer Audit – Development of Effective Audit Plans

Can audits encourage taxpayer compliance, or do they merely verify compliance and provide a means of correcting tax assessments?

TNM/10/03 provides guidance on how tax administrations can plan their audit programs to have a significant impact across the community rather than only affecting the taxpayers subjected to audit. Developing audit plans at strategic, operational, and case levels can provide administrations with valuable opportunities to go beyond detecting and correcting non-compliance, to actually improving the overall management of the tax system, including addressing deficiencies in the law and influencing future compliance.

The technical note provides a description of what factors need to be considered in planning an effective audit program as well as a “how to” guide using a step by step explanation of the processes involved in developing tiered and cascading strategic, operational, and case plans.

Taxpayer Audit – Use of Indirect Methods

Can an auditor go beyond an examination of a taxpayer’s books and records to verify compliance? What happens if a taxpayer has no books or records?

Many tax administrations rely solely upon taxpayer declarations, business records, and books of account to determine tax liabilities – direct methods. This practice presents taxpayers with easy opportunities to avoid tax by simply destroying evidence of transactions or creating fictitious records to support their declarations.

Legislators have generally given tax administrators the power to raise estimated or default assessments, but execution of these powers leads to many disputes when administrators are not able to defend their “guesses” of what a taxpayer should have declared.

TNM/10/05 provides a description of a range of indirect methods that have been successfully used to objectively measure tax liabilities when taxpayer declarations and books and records cannot be relied upon. The note also explains how the law in many jurisdictions, although not explicitly providing for indirect methods, does implicitly support the use of such methods. Furthermore, the note gives examples of court decisions that have moulded the development of accepted practices in the use of indirect methods and the discipline that is required in application to withstand challenges.

1/ Edmund Biber is a former Assistant Commissioner of the Australian Taxation Office and a Member of the IMF's Fiscal Affairs Department roster of experts.